Victor Jacobowitz (pictured, centre) was born in New York in 1932. He took over Allou Healthcare with two of his sons, Herman and Jacob, in 1985, before floating it on the stock exchange four years later. In the three decades following the purchase, the Jacobowitzes built it up into one of the largest distributors of health and beauty products in the United States, with a particular focus on perfume. By 2002, Allou reported net income of $6.6m on sales of $564m and employed more than 300 people, with warehouses in New York, Florida and California.
What was the scam?
From the 1990s onward, Allou had an agreement with lenders that allowed it to borrow up to 60% of its inventory and 80% of its invoices. This enabled it to start systematically inflating both its sales and its inventory by engaging in phoney transactions with independent companies owned by the Jacobowitz family, in order to borrow increasing amounts of money. Most of this money was used to aid the fraud, but some of it was skimmed. By 2002 a third of reported sales were fraudulent. To keep investors satisfied, accounts were also falsified to give the impression that the company was profitable.
What happened next?
By 2002 the gap between reported and actual inventory had become too great to hide. The cost of the accumulated borrowing also meant that the company was hopelessly insolvent. The family decided to burn down the main warehouse in New York and then claim on the insurance. However, the subsequent fire was ruled to have been started deliberately and when they attempted to bribe the fire marshalls, the police were notified. By 2003 the firm was declared bankrupt and several people involved in the fraud (including Herman and Jacob) were jailed.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Lessons for investors
The courts attempted to seize the defendants' property to repay Allou's debts, but lenders still lost an estimated $177m. Its shareholders ended up wiped out. In order to prevent its scam from being discovered, Allou regularly changed its auditors, with three (Mayer Rispler, Arthur Andersen and KPMG) taking the job over three years. Companies do occasionally switch auditors from time to time for various legitimate reasons, but several changes in such a short period are definitely a red flag that things are not what they seem.
-
Should you invest in UK equities?The FTSE 100 hit a record high this week, but UK equities remain unloved and undervalued compared to their global and US peers. Should you snap them up at a discount?
-
State pension errors: DWP urged to check for mistakes among divorced peopleFormer pensions minister Steve Webb says there are a high number of divorced women on low state pensions. Now MPs want the DWP to check if there were any errors in “potentially underpaying men and women who are divorced”.
-
Christopher Columbus Wilson: the spiv who cashed in on new-fangled radiosProfiles Christopher Columbus Wilson gave radios away to drum up business in his United Wireless Telegraph Company. The company went bankrupt and Wilson was convicted of fraud.
-
Great frauds in history: Philip Arnold’s big diamond hoaxProfiles Philip Arnold and his cousin John Slack lured investors into their mining company by claiming to have discovered large deposit of diamonds. There were no diamonds.
-
Great frauds in history: John MacGregor’s dodgy loans
Profiles When the Royal British Bank fell on hard times, founder John MacGregor started falsifying the accounts and paying dividends out of capital. The bank finally collapsed with liabilities of £539,131
-
Great frauds in history: the Independent West Middlesex Fire and Life Assurance Company's early Ponzi scheme
Profiles The Independent West Middlesex Fire and Life Assurance Company (IWM) offered annuities and life insurance policies at rates that proved too good to be true – thousands of policyholders who had handed over large sums were left with nothing.
-
Great frauds in history: Alan Bond’s debt-fuelled empireProfiles Alan Bond built an empire that encompassed brewing, mining, television on unsustainable amounts of debt, which led to his downfall and imprisonment.
-
Great frauds in history: Martin Grass’s debt bingeProfiles AS CEO of pharmacy chain Rite Aid. Martin Grass borrowed heavily to fund a string of acquisitions, then cooked the books to manage the debt, inflating profits by $1.6bn.
-
Great frauds in history: Tino De Angelis’ salad-oil scamProfiles Anthony “Tino” De Angelis decided to corner the market in soybean oil and borrowed large amounts of money secured against the salad oil in his company’s storage tanks. Salad oil that turned out to be water.
-
Great frauds in history: Gerard Lee Bevan’s dangerous debtsProfiles Gerard Lee Bevan bankrupted a stockbroker and an insurer, wiping out shareholders and partners alike.
